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Planning
dollars) presented in 6
7
8
4.8
5.6
5.6
used by a major 12
13
5.8
5
department store to 14
15
16
6.2
5.6
6.7
temporary sales 20
21
5.1
5.8
personnel. 22
23
24
6.7
5.2
6
25 5.8
Example: Weekly Department Store Sales
Weekly Sales
5
Sales
4 Sales (y)
0
0 5 10 15 20 25 30
Weeks
Example: Weekly Department Store Sales
Sales (y)
4 14 6.2 5.3
forecast
15 5.6 5.666667
16 6.7 5.6
3
17 5.2 6.166667
18 5.5 5.833333
2
19 5.8 5.8
20 5.1 5.5
1
21 5.8 5.466667
22 6.7 5.566667
0 23 5.2 5.866667
0 5 10 15 20 25 30
24 6 5.9
Weeks
25 5.8 5.966667
5.666667
Exponential Smoothing Methods
This method provides an exponentially
weighted moving average of all previously
observed values.
Appropriate for data with no predictable
upward or downward trend.
The aim is to estimate the current level and
use it as a forecast of future value.
Simple Exponential Smoothing Method
Formally, the exponential smoothing equation is
Ft 1 yt (1 ) Ft
Ft 1 forecast for the next period.
= smoothing constant.
yt = observed value of series in period t.
Ft = old forecast for period t.
The forecast Ft+1 is based on weighting the most recent
observation yt with a weight and weighting the most
recent forecast Ft with a weight of 1-
Simple Exponential Smoothing Method
The implication of exponential smoothing
can be better seen if the previous equation is
expanded by replacing Ft with its
components as follows:
Ft 1 yt (1 ) Ft
yt (1 )[ yt 1 (1 ) Ft 1 ]
yt (1 ) y t 1 (1 ) 2 Ft 1
Simple Exponential Smoothing Method
If this substitution process is repeated by
replacing Ft-1 by its components, Ft-2 by its
components, and so on the result is:
Ft 1 yt (1 ) y t 1 (1 ) 2 y t 2 (1 )3 y t 3 (1 )t 1 y1
0.6. 86
Sep-94 Apr-95 Oct-95 May-96 Dec-96 Jun-97
Date
Example:University of Michigan Index
of Consumer Sentiment
Date Consumer Sentiment Alpha =0.3 Alpha =0.6
Jan-95 97.6 #N/A #N/A
Feb-95 95.1 97.60 97.60
y t 1 y t ( yt y t ) Aug-96
Sep-96
95.3
94.7
92.34
93.23
93.49
94.58
120
100
80
Sentiment Index
Consumer Sentiment
60 SES (Alpha =0.3)
SES(Alpha=0.6)
40
20
0
Jun-94 Oct-95 Mar-97 Jul-98 Dec-99 Apr-01
Months
Holts Exponential smoothing
Holts two parameter exponential
smoothing method is an extension of simple
exponential smoothing.
It adds a growth factor (or trend factor) to
the smoothing equation as a way of
adjusting for the trend.
Holts Exponential smoothing
Three equations and two smoothing
constants are used in the model.
The exponentially smoothed series or current level
estimate.
Lt yt (1 )( Lt 1 bt 1 )
tool Company. 2
3
4
10
11
12
200
150
400
1997 1 13 550
These are quarterly 2
3
14
15
350
250
4 16 550
sales From 1994 1998 1
2
17
18
550
400
3 19 350
700
Saws
400
100
900
= .3 and = .1 800
700
Sales
sales
Ht+m
400
200
investigated. 0
0 5 10 15
Quarters
20 25 30
Winters Exponential Smoothing
Winters exponential smoothing model is the
second extension of the basic Exponential
smoothing model.
It is used for data that exhibit both trend and
seasonality.
It is a three parameter model that is an extension
of Holts method.
An additional equation adjusts the model for the
seasonal component.
Winters Exponential Smoothing
The four equations necessary for Winters
multiplicative method are:
The exponentially smoothed series:
yt
Lt (1 )( Lt 1 bt 1 )
St s
The trend estimate:
bt ( Lt Lt 1 ) (1 )bt 1
is: 900
800
500
Sales
sales
Ft+m
400
RMSE. 300
200
100
0
0 5 10 15 20 25 30
Quarters
Additive Seasonality
The seasonal component in Holt-Winters
method.
The basic equations for Holts Winters
additive method are:
Lt ( yt St s ) (1 )( Lt 1 bt 1 )
bt ( Lt Lt 1 ) (1 )bt 1
St ( yt Lt ) (1 ) St s
Ft m Lt bt m St m s
Additive Seasonality
The initial values for Ls and bs are identical
to those for the multiplicative method.
To initialize the seasonal indices we use
S1 y1 Ls , S2 y2 Ls ,, S s Ys Ls